Blockchain Association calls for re-examination of Custodia Bank's main account rejection case

The Blockchain Association supports Custodia Bank's challenge to the Federal Reserve

The Blockchain Association has expressed support for Custodia Bank's petition filed with the U.S. Supreme Court to challenge the Federal Reserve's refusal to grant the Wyoming chartered digital asset bank direct access to its payment system.

Abstract

The Blockchain Association supports Custodia Bank's challenge to the Supreme Court over the Federal Reserve's refusal of its master account application. Custodia Bank asked the court to determine whether the regional Federal Reserve Bank has the authority to refuse a qualified state-chartered agency to open a master account. The industry group warned that lower-court rulings could give federal regulators unbridled powers to restrict legitimate industries 'access to banking services. Custodia Bank has been applying for the Federal Reserve's main account since 2020, but the Federal Reserve Bank of Kansas City rejected its application in 2023. The Kansas City Fed has until September 11 to respond to Custodia's Supreme Court petition.

Focus of controversy: Regional Fed discretion

According to an amicus curiae brief filed Wednesday, the Blockchain Association asked the U.S. Supreme Court to review whether regional Federal Reserve banks have the power to refuse to provide primary accounts to state-chartered agencies that are legally eligible to apply for access. At the heart of the controversy is the authority that regional Fed banks have in deciding which institutions can directly connect to the central bank's payment infrastructure. Custodia Bank believes that the Monetary Control Act requires the Federal Reserve to provide payment services to eligible non-member deposit-taking institutions, while lower courts have ruled that regional Federal Reserve banks retain discretion in whether to approve applications.

In a filing, the industry group warned that maintaining such discretion could affect state-chartered banks that serve legitimate industries that may not be recognized by federal regulators. "No legitimate industry should be excluded from basic banking services due to regulatory pressure or unfettered administrative discretion," the association said in a post on Platform X. The group added that the case was about "whether legitimate digital asset businesses can compete on an equal footing when seeking access to financial infrastructure."

Impact of the case: Banking service access issues

The Fed master account allows eligible institutions to connect directly to the central bank's payment services without having to transact through a correspondent bank with its own Fed access. For banks focused on cryptocurrencies, direct access can reduce their reliance on third-party banking relationships for dollar transfers and settlements. Custodia Bank has argued during its litigation that this issue is particularly important for state-chartered agencies that otherwise meet legal requirements to seek Federal Reserve services.

The Blockchain Association further elaborated on this argument in its Supreme Court statement, focusing on its view of the possible consequences of allowing the Federal Reserve Bank to decide on which eligible institutions obtain accounts. The group believes that the lower court's ruling could provide "a blueprint for federal regulators to debanicate unpopular industries or companies in the future without interference from state regulators."

Case progress: Custodia Bank submits application for a transfer order

Supreme Court case records show that Custodia Bank filed an application for a cassation order on July 10, after Judge Neil Gossac gave the bank additional time to bring the case to the Supreme Court. The application was filed on July 14 under the name of Custodia Bank, Inc. v. Federal Reserve Board of Governors, et al.。Custodia Bank asked a judge to review the Tenth Circuit Court of Appeals 'interpretation of federal law rather than directly rule on whether the bank is currently eligible for a master account. The focus of controversy is whether the statement in the Monetary Control Act that Fed services are "available" to qualified non-member deposit-taking institutions gives regional Fed banks the discretion to refuse to open accounts. The Federal Reserve Bank of Kansas City has until September 11 to respond to Custodia's petition.

Background of the case: Years of legal battle

Custodia Bank, founded by Wall Street veteran Kaitlyn Long, obtained a Wyoming special purpose deposit institution license and applied for a master account from the Kansas City Fed in October 2020. The application has been on hold for more than a year without processing. In June 2022, Custodia Bank sued the Federal Reserve Board of Governors and the Kansas City Fed, initially challenging the 19-month delay in processing its application. In January 2023, the Kansas City Fed rejected the application. Federal regulators cited safety and soundness concerns related to Custodia Bank's business model focused on cryptocurrencies, including its excessive concentration of digital asset activities.

After the application was rejected, the legal battle continued. Custodia Bank believes that federal law does not give regional Fed banks unlimited discretion to refuse to provide primary accounts to eligible institutions. In March 2024, the Federal District Court rejected the bank's position. Chief Justice Scott Skavdahl ruled that the Kansas City Fed had the legal power to refuse the application and rejected Custodia Bank's request to enforce access to the central bank's payment infrastructure. Custodia Bank appealed, but the 10th Circuit Court of Appeals again upheld the Federal Reserve. The appeal ruling held that the Federal Reserve Bank reserved the right to determine whether eligible institutions should obtain a master account. In March this year, the Full Court of Appeal voted 7 - 3 to reject Custodia Bank's request for a full retrial, upholding the previous ruling. Judges Timothy Timkovic and Alison Idd disagreed with the decision, arguing that the majority gave the Federal Reserve Bank too much unfettered power over state-chartered agencies. Court records of the retrial process also described primary account access as an "indispensable" condition for bank operations because the Federal Reserve Bank's services include wire transfer and electronic transfer systems used by deposit-taking institutions to transfer funds. The petition filed with the Supreme Court is Custodia Bank's latest attempt to overturn this interpretation of the law since the District Court ruling.

Related developments: Kraken was approved to change the debate landscape

While Custodia Bank continues its court battle, another Wyoming chartered cryptocurrency institution has gained limited but direct access to the Federal Reserve's payments system. In March, the Kansas City Federal Reserve approved Kraken Financial's limited purpose master account, making the cryptocurrency exchange's banking arm the first cryptocurrency native institution to gain such access. The account allows Kraken Financial to connect to the core Federal Reserve payment infrastructure for dollar settlement, but does not receive all the benefits of a traditional master account. The arrangement does not give Kraken the authority to receive interest on reserve balances or the Federal Reserve's liquidity facilities. Banking groups, including the Independent Community Bankers Association and the Banking Policy Institute, questioned the decision and expressed concerns about allowing Wyoming SPDI that does not hold federal deposit insurance to have direct access to the Federal Reserve's infrastructure. Rep. Maxine Waters then asked Kansas City Fed President Jeff Schmid to provide details about the approval, including what Fed services Kraken Financial could use, the conditions attached to the account, and the legal basis for approving access. Waters also requested information on anti-money laundering and consumer protection reviews related to the decision.

Since then, federal policymakers have considered establishing a more formal path for restricted payment access. In May this year, the Federal Reserve proposed a type of limited payment account that would allow eligible fintech companies and cryptocurrency-related institutions to use clearing and settlement services without having to obtain all the privileges available to traditional banks. Under the proposed restricted account framework, applicants will still need to operate through affiliated companies that qualify as a qualified deposit institution under the Federal Reserve Act. The Fed also requires regional Federal Reserve banks to suspend processing decisions involving third-level master account applications during policy review. The rule-making process is expected to end on December 31, 2026. Kraken Financial's limited accounts were approved before the process was completed. Its arrangements allow access to payment services, but do not include interest on reserve balances and the right to borrow through the Federal Reserve's discount window.